Iceland will need a financial tax that limits capital movements to retain the krona as its currency, the Sedlabanki’s Gylfi Zoega said.
“If we’re going to hold on to the krona we need to limit foreign exchange movement with a Tobin tax to protect the economy from financial transactions,” Zoega, a member of Iceland’s central bank’s monetary policy committee, said in a television interview with Channel 2. “It’s these financial transactions that have lifted everything up here and then dragged everything down.”
The Tobin tax, named after U.S. economist James Tobin, puts a penalty on short-term investments in currencies with high interest rates and thereby limits carry trades. That procedure allows an investor to borrow low-yielding currencies and carry the funds into higher-yielding markets such as the krona to make a profit.
“When there’s an upswing, money enters the economy and the krona strengthens and then it leaves and everything tumbles,” said Zoega. “This needs to be stopped” and Iceland should also implement rules that “separate investment and retail banking and closely monitor bank debt and bank loans.”
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